1. Field of the Invention
The present invention relates to the field of credit account products and, more specifically, credit account products that provide for the recovery of charged-off debt.
2. Description of Related Art
Non-paying customers are a reality that credit-issuing businesses cannot totally avoid. When a customer stops paying on a credit account with a positive balance, the creditor must decide how to handle the outstanding debt and attempt to recover at least some of the loss that the account balance represents. Initially, a variety of notices are usually used to encourage the customer to begin paying on the account again. However, after a substantial period of non-payment, most credit-issuers will classify the account as charged-off—representing that they have recognized the unlikelihood of collecting on the full debt obligation.
There are a variety of ways to deal with charged-off accounts. Some common approaches include internal or external departments that negotiate settlement or refinancing for the repayment of some or all of the debt, usually on different terms than those originally associated with the account. Another approach is the use of outside collection agencies that purchase the debt at some reduced rate or charge a commission for recovered monies. Unfortunately, many common tactics have limited success rates and frequently damage the customer relationship.
One approach to the recovery of charged-off debts that has the benefit of both increased collections and maintaining the customer relationship is the use of debt recovery credit accounts, such as reaffirmation credit cards. Essentially, debt recovery credit accounts extend a new credit account to the customer conditioned on repayment of some, or all, of the charged-off debt obligation. In the case of reaffirmation credit cards, the customer is reaffirming their debt obligation to the credit issuer in return for a new line of credit.
Prior methods of administering reaffirmation credit cards involve a two record model. The first record is the credit account itself, with an associated balance, credit limit, interest rate, and other features. The second record is a pre-existing debt record. The pre-existing debt record is a holding account that is reduced by customer payments and may or may not have an interest rate or other features. As payments to the reaffirmation credit card are received, they are split between the two accounts according to some formula (50/50, 25/75, or more complicated fixed or percentage formulas that give payment preferences for new charges or pre-existing debt). Interest rates, service charges, minimum payment formulas, and other aspects are usually different for the two records. For example, the credit account may be administered like any standard credit account, while the pre-existing debt record is an interest free account as long as regular payments continue to be made.
In one version of a reaffirmation credit card, the charged-off debt is actually split between the credit account and the pre-existing debt record. For example, if the charged-off debt was $1000, the opening balance of the credit account would be $500 and the opening balance of the pre-existing debt record would be $500. The credit limit for the credit account would be set to the starting balance ($500), making the available balance $0.
In an alternate version of the reaffirmation credit card, the entire charged-off debt is placed in the pre-exiting debt record—for example, providing an opening credit account balance of $0 and an opening pre-existing debt balance of $1000. The credit limit of the credit account is then set to a low value, such as $50, to provide an initial available credit of $50. Increases of the low starting credit limit can then be based upon establishment of a regular payment history or other criteria moving forward.
Either configuration of the reaffirmation credit card requires the administration of two account records. This increases administrative overhead, complicates formulas and transactions, and makes the account more difficult for the customer to understand and effectively administer. In addition, both configurations provide a credit card to the customer at enrollment and make credit available immediately or after the first payment, no matter how small.
Accordingly, there is a need for a debt recovery credit account that is easier to administer and use than the two record approach of prior reaffirmation credit cards. Improved incentives for payment and limits on the credit-issuer's initial exposure to non-payment or new credit liabilities would also be advantageous.